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Better Late than Never — IRS Issues Long-Awaited Guidance for Retirement Plans Regarding Application of Windsor Decision

Employee Benefits Law Alert

On April 4, the IRS issued Notice 2014-19 (Notice), providing much-anticipated guidance on the retroactive application of the Supreme Court’s decision in United States v. Windsor (Windsor) on retirement plans. The IRS also issued updated FAQs for retirement plans (available here) that provide additional information regarding the application of Windsor, and supplemental guidance. In general, the Notice provides that retirement plans are not required to apply the Windsor decision prior to June 26, 2013 and addresses additional unanswered questions facing employers, including the content and timing of required plan amendments.

Background
Many questions were left unanswered in the wake of the Windsor decision, most notably those relating to the application of the decision (including retroactive application) on federal laws affecting employee benefits. Employers were left questioning how, if at all, they needed to change their plans to comply with the Supreme Court’s decision. Our summary of the Windsor decision and a discussion of the impact of the decision on benefit plans with respect to same-sex spouses is available here.

On August 29, 2013, the IRS issued Revenue Ruling 2013-17 (Ruling) and two sets of Frequently Asked Questions as its first wave of guidance regarding the impact of Windsor on employee benefit plans. Under the Ruling, the IRS stated that, effective September 16, 2013, it would determine the marital status of a same-sex couple using the so-called “state of celebration” rule on a prospective basis. The “state of celebration” rule means that if a same-sex couple is legally married in a jurisdiction that recognizes the marriage, that couple will be treated as married for federal tax purposes, regardless of whether the state in which the couple resides recognizes the marriage. However, the question of how employers should treat same-sex spouses for retirement plan purposes for periods prior to September 16, 2013 was not addressed. Our summary of Revenue Ruling 2013-17 and the FAQs is available here.

IRS Notice 2014-19 and Revised FAQs Address Key Issues, Including Retroactive Application
The Notice provides that qualified retirement plans are not required to comply with the Windsor decision prior to June 26, 2013. However, effective as of June 26, 2013, any retirement plan qualification rule that applies to a married participant must be applied to a participant who is married to a same-sex spouse. For example, a participant’s same-sex spouse must be treated as a spouse for purposes of the qualified joint and survivor annuity and qualified preretirement survivor annuity rules under certain retirement plans.

The FAQs clarify that the Notice applies to 403(b) plans; however, the Notice has limited application to 403(b) plans that are not subject to ERISA. For example, for those plans not subject to ERISA, the term “spouse” is relevant for the required minimum distribution and direct rollover rules but not the qualified joint and survivor annuity and qualified preretirement survivor annuity rules, since those rules do not apply to such plans.

The timeline below summarizes the applicability of the Windsor decision and the supplemental guidance with respect to retirement plans:

Plan Amendment Requirement and Deadlines
The Notice confirms that not all retirement plans must be amended to comply with the Windsor decision and the Ruling. Although a clarifying amendment may be helpful for purposes of plan administration, a plan amendment is required only in the following circumstances:

  • The retirement plan defines the terms “spouse,” “married,” “husband”/”wife,” or other marital term by referring to Section 3 of DOMA or in a way that is otherwise inconsistent with the Windsor decision or the Ruling. (Plans that use “legally married spouse,” “spouse under federal law,” or other terms that do not draw a distinction between a same-sex spouse and an opposite-sex spouse do not need to be amended.)
  • The plan sponsor chooses to retroactively apply the Windsor decision prior to June 26, 2013.
  • The plan sponsor chooses to use the “state of celebration” standard instead of the “state of domicile” standard for the time period between June 26, 2013 and September 16, 2013.

The deadline for adopting plan amendments pursuant to the Notice is the later of (1) December 31, 2014 or (2) the deadline under Revenue Procedure 2007-44 (i.e., the later of [A] the end of the plan year in which the change is first effective or [B] the due date of the employer’s tax return for the tax year that includes the date on which the change is first effective). Special amendment timing rules apply to governmental plans and 403 plans. In the case of a governmental plan, an amendment does not need to be adopted until the end of the first regular legislative session that ends after December 31, 2014. The deadline for adopting an amendment to a 403(b) plan is the last day of the plan’s remedial amendment period.

As noted above, employers should take immediate action to determine how the Notice affects their retirement plans. Some examples of actions steps employers may need to take include:

  • Gathering information about whether employees who are currently considered “unmarried” are, in fact, married;
  • Assessing the desire/feasibility of implementing Windsor decision prior to June 26, 2013;
  • Determining whether the “state of domicile” or the “state of celebration” standard will be used for the period between June 26, 2013 and September 16, 2013;
  • Working with payroll vendors and plan vendors to make system adjustments; and
  • Amending retirement plan documents and updating summary plan descriptions and other communication materials.

For more information on the Windsor decision and related issues, contact Marla Anderson at (312) 715-5079 / marla.anderson@quarles.com, Sarah Touzalin at (312) 715-5179 / sarah.touzalin@quarles.com, or your Quarles & Brady attorney.